More big mine projects at risk

Reserve Bank of Australia governor Glenn Stevens told a parliamentary committee on Friday that some projects “really shouldn’t be done” when asked about whether the resources boom was faltering.
Andrew Meares

The decline of the resources boom is threatening
Gina Rinehart
’s Roy Hill iron ore mine in Western Australia and Xstrata’s Wandoan coalmine in Queensland, two of the biggest mining projects after
BHP Billiton
’s Olympic Dam.

Analysts believe the $6 billion Wandoan project is in danger of collapsing because of falling coal prices and high costs. Mrs Rinehart is working to convince export credit agencies, mainly in Japan and Korea, to lend her at least $4 billion. Such funding is increasingly important because commercial banks are setting tougher terms for the remaining $3 billion needed for the project.

But Reserve Bank of Australia governor
Glenn Stevens
said the abandonment of some projects would reduce pressure on the economy, a sign that the central bank is happy for the resources investment boom to taper off.

Mr Stevens told a parliamentary committee on Friday that some projects “really shouldn’t be done" when asked about whether the resources boom was faltering.

BHP’s decision to shelve the $US20 billion Olympic Dam expansion in South Australia has spooked international investors, who are increasingly wary of the high cost of accommodation, labour, equipment and regulatory approvals compared with other countries. Federal Resources Minister
Martin Ferguson
reinforced those concerns this week when he said the resources boom was over, although the government quickly played down his remarks.

Mr Stevens said investment in resources projects would probably peak in a year or two.

“After that, the rate of resource investment is likely to decline, while the export shipments of the resources themselves will pick up," he said.

“By then we might expect that some other sectors that have been weak of late, like residential and non-residential construction, might be starting to pick up."

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Shadow treasurer
Joe Hockey
said the remarks in effect confirmed Mr Ferguson’s statement that the resources boom was ending.

BHP said on Friday it would cut staff in its Adelaide offices from 190 to 50 because of the Olympic Dam decision. The project’s shelving was a huge blow to the South Australian Labor government, which had hoped to win credit for creating thousands of jobs.

Government officials feel they were personally misled by BHP chief executive
Marius Kloppers
over the project, sources said.

The SA government may increase the royalty rates of 5 per cent for uranium and 3.5 per cent for other metals after the arrangements covering Olympic Dam expire in mid-December.

The strength of the resources boom is a key issue for the Gillard government, which has hitched its economic credibility to a pledge to deliver a surplus this year, requiring continuing strong revenue from high commodity exports.

Treasurer
Wayne Swan
has played down concerns that the resources boom was at an end, saying the “advanced pipeline" of projects was worth $270 billion.

“The pipeline will be there, creating wealth and in the future creating exports for Australia," he said on Friday.

Mr Hockey seized on the uncertainty about the boom, saying the Coalition had warned its end would “create a massive structural change in the budget".

Mr Stevens used his testimony before a parliamentary committee in Canberra on Friday to emphasise the economy’s strengths, pointing out that “with regard to the peak in the pipeline, I do not think we have seen any evidence lately that causes us to change the timing of that in any material fashion".

He also said there was a long list of potential projects that “in truth, really should not be done, because if they were all attempted – there is already pressure on the cost side for the resource companies doing what they are doing".

Xstrata’s corporate affairs and government relations executive, Mick Buffier, told a Hunter Valley business lunch this week that the cost of building a new thermal coal mine in Australia was 66 per cent dearer than anywhere else in the world last year, at $US176 a tonne versus $US106 a tonne. In 2007, he said, it was 16 per cent cheaper.

Iron ore prices fell to lows not seen since the global financial crisis in Australian dollar terms, ending at $US99.60 a tonne on Thursday.

Earlier Mr Kloppers said Pilbara cost inflation has run at 700 per cent over the past decade in $US terms, prompting BHP’s decision to postpone an investment to increase its iron ore mining capacity in Western Australia. About half of that sevenfold increase is a direct result of the $A doubling over 10 years.

However, as more projects like BHP’s Outer Harbour expansion are cancelled or delayed, a source close to Mrs Rinehart’s Hancock Prospecting said cost pressures in the Pilbara were coming back into line and contractors’ asking prices were more reasonable, boosting the outlook for new operators like Mrs Rinehart.

Other projects, including Xstrata’s $US6 billion Wandoan thermal coal mine in Queensland’s Surat Basin, are said to be looking increasingly unlikely to proceed.

“I think the one everyone is most worried about at the moment is Wandoan," the source said.

A spokesman for Xstrata said the company was still engaged in the approvals process and was yet to make a decision. Thermal coal prices have stabilised at about $US85 a tonne as more miners – including
Rio Tinto
and BHP Billiton – shelve expansion plans and take marginal mines out of production.

The stubbornly high local currency pushed iron ore prices back to lows plumbed during the worst of the global financial prices in Australian dollar terms.

Rampant cost inflation also means miners today are earning even lower margins than they did when prices collapsed in 2008.

“The interesting thing is what is happening with the currency," CLSA analyst Ian Roper said.

“Back in the GFC when iron ore prices collapsed to $US60 a tonne at least the dollar was trading at US60¢.

“That’s effectively the same price as now and those same miners have seen five years of huge cost inflation since then."

The economics of Mrs Rinehart’s Roy Hill iron ore mine rest on a $US100 a tonne average iron ore price over the next decade, but some analysts are becoming increasingly pessimistic about the longer term outlook for ore prices.

Mr Roper said he still expects iron ore to revert to $US72 a tonne by 2015 and his ten year forecast is “nowhere near" $US100 a tonne.

Fortescue Metals Group chief executive Nev Power said that prices would rebound to $US150 a tonne by year-end as China spends more aggressively on infrastructure and real estate projects that consume a lot of steel. Fortescue’s marketing chief David Liu added that traders would soon re-enter the market to help support prices.

But a major trader based in Perth told The Weekend Financial Review that buying activity would be non-existent until traders could find Chinese steel mills to buy cargoes.